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    Imperfect enforcement, foreign investment, and foreign aid

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    Issue Date
    2002-09
    Author
    Asiedu, Elizabeth
    Villamil, Anne P.
    Publisher
    Cambridge University Press
    Format
    146101 bytes
    Type
    Article
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    Abstract
    The lack of a supranational legal authority that can enforce private contracts across borders makes debt repayment in an international setting contingent on borrowers' willingness to pay rather than ability to pay. This market failure (i.e., inadequate enforcement) causes investment to fall short of its unconstrained level. This paper examines how foreign aid affects a country's willingness to honor private investment agreements. We consider two types of aid: technical assistance and loan subsidies. We show that when enforcement is inadequate, aid has the following effects: (i) it reduces default risk, promotes capital flows, and can, in principle, restore investment to its unconstrained level; (ii) when default risk is high, aid can increase the welfare of both the recipient and the donor country. Thus, foreign aid serves as an enforcement mechanism in an international setting. This provides a nonaltruistic rationale for foreign aid. Finally, we discuss the implications of providing bilateral versus multilateral aid (e.g., by individual countries versus multilateral organizations).
    URI
    http://hdl.handle.net/1808/782
    DOI
    https://doi.org/10.1017/S1365100501010070
    Collections
    • Center for Latin American and Caribbean Studies Scholarly Works [738]
    • Economics Scholarly Works [183]
    • Kansas African Studies Center Scholarly Works [272]
    Citation
    Asiedu, Elizabeth; Villamil, AP. Imperfect enforcement, foreign investment, and foreign aid. Macroeconomic Dynamics. Sep 2002. 6(4) : 476-495.

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    Contact KU ScholarWorks
    785-864-8983
    KU Libraries
    1425 Jayhawk Blvd
    Lawrence, KS 66045
    785-864-8983

    KU Libraries
    1425 Jayhawk Blvd
    Lawrence, KS 66045
    Image Credits
     

     

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